Nicolaes Tollenaar, The European Commission’s Proposal for a Directive on Preventive Restructuring Proceedings (June 1, 2017). Insolvency Intelligence, Vol. 30(5), 2017. Available at SSRN: https://ssrn.com/abstract=2978137
On 22 November 2016 the European Commission (EC) published a proposal for a directive on preventive restructuring proceedings (COM(2016) 723 final. The proposed directive, when adopted, will require the Member States of the European Union (EU) to introduce preventive restructuring proceedings into their national systems. This will drastically change the restructuring and insolvency landscape of Europe and have a profound impact on how international restructurings with a European nexus will be dealt with in the future. The preventive restructuring procedure that the EC seeks to introduce can perhaps best be described as a light-touch “stand alone” pre-insolvency plan procedure available outside the context of traditional more heavy-handed insolvency proceedings. The proposed plan procedure is strongly inspired by the English scheme of arrangement and the plan procedure contained in Chapter 11 of the US Bankruptcy Code and features elements of both. A majority within a class will be able to bind a minority within the same class. The procedure will also feature the ability to impose a plan over the objections of one or more dissenting classes subject to certain requirements (cram down). In a number of ways the procedure proposed by the EC will, however, be more efficient and streamlined than its existing English and American counterparts. This paper offers a discussion and critique of the restructuring procedure set forth in the proposed directive. It discusses the relevant provisions of the EC’s proposal and offers an in-depth discussion of certain more fundamental aspects, including i) the justification for and nature of the proposed proceedings, ii) the question who should have the right to propose a plan and when, iii) the distribution rules that should apply upon cram down and iv) the protection of the rights of creditors who would be entitled to a distribution in cash upon liquidation. The conclusion is that the proposal contains a number of fundamental architectural flaws that make it unsuitable for implementation in current form. However, if the required corrections are made, the Member States of the European Union will have a blueprint for a restructuring procedure that could very well out-perform its existing English and American counterparts. Where the EC has drawn on proven mechanisms in certain jurisdictions, jurisdictions outside the EU may, conversely, also find useful features to draw on in the EC proposal. In particular, the US may wish to consider the introduction of modern light-touch pre-insolvency proceedings as envisaged by the EC, as an alternative to the more “old school” heavy-handed and very costly court-driven process of Chapter 11.